CERC is finding its room for decision-making limited by govt orders

The hot Indian summers have often been a difficult time for power sector mandarins as the stress rises in the system to balance surging demand with supply. Nowhere is this more evident than at the Central Electricity Regulatory Commission (CERC). The electricity regulator’s chief Jishnu Barua has just received a strongly-worded note dated May 8 from the power ministry asking the Commission to take government approval before making any regulations public. 

Barua has been in the job for just over two months (he joined in March this year). He arrived after the CERC had been without a chairman for eight months, when the last incumbent, P K Pujari’s term, ended in June last year. Barua was chief secretary of Assam holding additional charge as chairman of Assam Power Distribution Company.  

All told, Barua appears to have attracted the ministry’s displeasure in a remarkably short time. Power minister R K Singh has used Section 107 of the Electricity Act to tell the CERC, “In the recent past, the Ministry of Power came across a number of critical issues to address which it had to issue policy directions to CERC necessitating amendments in its regulations. Frequent changes in regulations are not in the interest of a predictable and stable regulatory framework in the country.” Over the weekend at least two chiefs of power companies told <Business Standard> that their investors have asked them how much to read into this missive.

What was the power ministry’s letter referring to? On the last day of December 2022, the power ministry issued a radical order. A new rule was inserted in the Electricity Act stating that distribution companies (power distribution companies) have the right to approach the regulator, ie CERC, and get prices at which they bill consumers revised within 90 days of regulations being published. The regulator has to take a decision on such applications within 120 days extendable to 150 days.

Significantly, if the permission does not come through, it is deemed to have been given. 

The order puts the onus on the discoms to decide whether to carry the risks of not passing on higher variable costs of power they buy or allow for a pass-through to consumers. The catch is that it sharply whittles the role of the CERC and state-level regulators. 

Most of the state-level regulators have made the necessary changes in the regulations, but it is also understood that some have also reached out to the central regulator to express their concern at this carte blanche on pricing power to discoms.

It is not known as of now if Barua and CERC members planned to re-examine this new rule. But the power ministry letter does provide some clues. Citing the need for reforms in the sector it says, “CERC must consult the Ministry of Power in detail at the stage of formulating regulations. This will ensure that the regulations are consistent with the rules framed by the government and the government’s reforms agenda, and will also obviate the necessity of any subsequent policy direction the Government under Section 107”.

It is not the first time the power ministry has issued directions under this section of the Act — about a dozen issued since 2018, the latest being March 2022, but given how relatively weak the headless CERC has been for a long time, the sweeping tone of the latest has caught attention. 

The problem is as follows: In the principal-agent relationship in which regulators are supposed to operate, it is the Parliament that is the final arbiter. Regulators such as CERC are created by the legislature, as the agent. When the law is written well, the regulator and the ministry share the same level of authority, meaning none of them are supposed to be superior to the other. 

The additional issue here is that the power ministry is the majority shareholder in several key companies such as NTPC. In these circumstances, the regulator can offer an unbiased set of policies to promote competition in the power sector that has substantial private sector participation, draw in investments and advise the government and “thus foster the interests of consumers”.

In practice, the commission acts more as a judicial entity among the power producers and the buyer companies within a highly politically driven environment. “There is a tendency to over-judicialise the field of regulation, which increases costs and tends to benefit financially stronger parties in legal disputes,” a blog written by think tank, Centre for Policy Research noted. No one on any side of the development was willing to speak on the record. 

Data shows that most years CERC issues over 500 orders. In 2022 it was a massive 631. In 2023, the numbers have already reached 213. But these are overwhelmingly on disputes between parties on tariff issues, none that can be considered as dealing with reforms in the sector. The Commission’s publication of its annual report is overdue. The last one was published for the year FY20. Generation companies were surprised in 2021 when the CERC passed an order allowing discoms space to terminate power purchase agreement (PPAs) but did not offer generators the same leeway and offered no reason for it. Again, even as the field of renewable energy has gained traction, the CERC has been surprisingly reticent on its scope. 

Reforms in the sector have instead passed on to the power ministry, which it has often done by amending the two-decade old Electricity Act. In a measure of its discomfiture with the CERC, the amendment at one stage included a provision for an Electricity Contract Enforcement Authority. The proposal was finally dropped.

Not all measures brought in by the ministry have, however, been forward looking. For instance, it has put a cap on the maximum electricity price that can be discovered in the power exchanges. Yet just as in the RBI Act there is a clause, Section 7 that allows the finance ministry to issue directions but created a furore when it was used in 2018, it may be better for the power ministry to deploy Section 107 with greater discretion.

Who decides on reforms in power sector
 

• Role of the ministry seen as making broad policy framework under the Electricity Act— tariff policy and national electricity policy
• Ministry can give policy guidance for the sector and the regulator is guided by that policy framework
• CERC reckons that government can give directions to the central regulator, but the regulator is not bound by its advice
• Power ministry has taken recourse to Section 107 of the Electricity Act to give “directions” instead
• Has got complicated since CERC without a chairman for eight months till March 2023
• CERC hemmed in by huge demands for judicial interventions